Globally, scientists and specialists have long advised on climate change and its potential to lead to a rise in extreme weather events.
Scientific evidence supports this assertion, as demonstrated by the stark transitions from severe droughts to floods, all in a few months in northern and central Namibia, as well as the wildfires causing severe devastation in southern California in the United States.
Climate scientists believe the warming temperatures and droughts have caused frequent and intense wildfires.
Losses from California’s fires are projected at between US$20 billion and US$50 billion.
Customer premiums, reinsurance and capital markets are the primary sources of funding for insurers to cover expenses associated with disasters of this magnitude.
Premiums paid by policyholders are intended to cover the cost of anticipated losses and risk transmitted from households to insurers, as well as the cost of reinsurance and any insurance-like coverage insurers acquire in the capital markets.
However, valuation of this risk becomes more challenging as the uncertainty associated with climate change increases.
SERIOUS CONCERNS
This raises serious concerns about the sustainability of underwriting methods by insurers in areas prone to climatic catastrophes and whether insurers will maintain their readiness to underwrite if such disasters become increasingly frequent.
Given the scale of the problem, reinsurance companies, are usually the most affected.
The tangible implications of climate change are generally known, but how it cascades down to the everyday person is frequently not easy to quantify.
Mapping manifestation risk is tricky because of the future-forward nature of climate risk.
However, the reality persists: Climate change is changing financial models, and we are seeing more and more assets exposed to the risk of becoming stranded assets.
For context, there are three main types of climate change-related risk.
- • Physical risks arise from climate change’s physical effects and are broken into acute physical risks and sudden events such as flash floods and wildfires.
- • Chronic physical risks are those physical risks that occur over longer terms, such as rising seawater and desertification.
- • The other main types of climate risks are transition risks, which arise from the economic shift to a low-carbon economy, and liability risk, which is the potential for legal claims and insurance claims related to climate change.
In an era of escalating climate uncertainty, it is imperative to comprehend and mitigate these risks as they will affect the average person both directly and indirectly.
REDEFINING THE ‘KNOWNS’
According to the latest FNB House Price Index, a 12-month growth of 7% was recorded after the third quarter of 2024 compared to 1.7% at the end of the second quarter of 2024 and 3.3% in 2023.
This suggests a potential stabilisation towards pre-pandemic levels, and one can optimistically anticipate a rise in the number of new homeowners.
The truth remains that depending on the vulnerability and exposure, Namibian real estate is particularly susceptible to physical climate change risk, as buildings are situated in fixed locations.
For this reason, climate change is significantly transforming how we look at homeownership, redefining traditional concepts of property security and valuation.
It shapes financial institutions’ approach to evaluating risks as climate-related factors can manifest as credit, legal and collateral risks.
Imagine a scenario where you own a home, and after 15 years, as you approach the end of your mortgage, a flood engulfs your home, negatively affecting its value.
While this may evoke images from a science fiction film, it increasingly reflects the reality we face as climate-related disasters rise in frequency and intensity.
A house, irrespective of one’s socio-economic status, represents a substantial investment; homeownership is a remarkable achievement that transcends more than just a roof over one’s head.
For that reason, it requires robust due diligence and considering various scenarios when accessing risks associated with your prospective purchase.
It expands deeper than the affordability, pre-approval or perception.
REFINING SPECIFICS
The most important thing for an aspiring homeowner is understanding the vital information available in order to guarantee an informed decision.
The valuation can tell you essential information about the property; additionally, understanding the local climate risk associated with the area goes a long way.
The high property costs in Namibia have prompted many potential homeowners and developers to disregard significant warning signs, resulting in homes being built in areas susceptible to climate disasters.
The issue remains complex and lacks a straightforward resolution.
It is essential to understand the interconnected nature of climate risk as it flows into the property market and subsequently affects banks, insurers, asset managers, property owners and the broader financial system.
This insight can equip you with a clearer perspective on potential risks.
The good news is that physical risks can be more accurately predicted, understood and mitigated.
A variety of tools are available to evaluate the likelihood of flooding, for example.
However, the issue has always been that these tools are not geo-specific to our region, and the algorithms do not function properly because of data gaps. Consequently, current global climate models must be downscaled in spatial and temporal resolution, as they were developed for global use on a multi-decade timescale.
Exposure must be geographically mapped and combined with the information on vulnerability and resilience to estimate these physical risks.
This necessitates a collaborative effort among relevant government entities, the private sector and academia, as it necessitates multiple subsets of data and investment.
NAVIGATING THE FUTURE
Anthropogenetic climate change is a vast subject requiring comprehensive, multidisciplinary scientific research.
It raises a multitude of ethical, social and political concerns, in addition to economic and financial ones.
Therefore, it must be thoughtfully evaluated.
It is of utmost importance that governments recognise the significance of their role in advancing climate action and championing reducing carbon emissions to meet net zero targets, as outlined in the Paris Agreement.
A proactive approach is essential to mitigate the risks of climate-related disasters, including floods and wildfires.
It is essential to reach a unified strategy for tackling climate uncertainty and to explore improved avenues for securing a more predictable climate future.
- – Brenton David holds a master’s degree in development policy (sustainable development and international development) from the KDI School of Public Policy and Management; Charity Mufwinda holds a master’s degree in commercial law from the University of Stellenbosch. The views expressed in this article are solely their own.
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